A high-performing procurement unit is a strategic differentiator in project-based industries characterized by high procurement costs and low profit margins. This is especially true for sectors such as real estate and construction, where the cost of procured goods and services typically comprises between 60 and 80 percent of all costs.
Most companies have established strategic and centralized procurement units to manage their spend through levers such as category strategies and strategic supplier framework agreements. The rationale for this approach is to channel category spend towards framework agreements where increased volume is rewarded with reduced unit costs. Despite of this, companies struggle to create substantial benefits through their central procurement units.
Lack of alignment between strategy and execution
The symptoms for poor procurement performance are typically low operational loyalty to framework agreements and a correspondingly low percentage of “managed spend”. The root cause behind this is often found to be a lack of alignment between the strategic procurement units and the operational day-to-day procurement activities that occur in the projects.
We see that the lacking alignment between strategic and operational procurement have two main causes:
- Strategic procurement is not sufficiently involved in early phase project estimation and supplier selection
In traditional project delivery models, most decisions related to procurement cost estimations and choice of suppliers are made during the tendering process and early-phase project planning. We often see that these processes are carried out with little or no participation from strategic procurement. This effectively cripples the strategic procurement unit’s ability to generate commercial value for operational projects.
- Strategic procurement resources in projects are evaluated on cost rather than value
Managers of large projects are measured on the projects’ P&L. Hence, they are incentivized to minimize overhead cost from non-operational resources. Involvement of strategic procurement resources in projects are perceived as additional and unwanted overhead for the project as procurement often is seen as an operational activity that easily can be handled by other administrative project resources.
As a result of this, strategic procurement units are left with a supervisory role that tends to report on compliance to framework agreements rather than delivering on the potential to drive commercial benefits across projects.
Rethinking the procurement operating model
Although the potential benefits of transitioning into a strategic category-based approach are evident, companies need to adjust their procurement operating model in order to realize these benefits. In essence, centralized and strategically oriented procurement units need to get their hands dirty and gain a better understand of projects in the field, and operations as such. To get there, companies must redefine the mandates of the centralized unit by adjusting corporate policies. The following two actions should be taken to enable a high-performing central procurement unit:
- Establish a corporate policy that requires involvement of strategic procurement resources in tendering and early-phase project planning in order to influence choice of materials and suppliers
- Implement a corporate policy that ensures mandatory involvement of strategic procurement resources in all projects above a minimum threshold of financial value or strategic importance
Furthermore, the role descriptions and scope of strategic procurement resources must be expanded from pure procurement strategy development and category monitoring to also include execution in projects. This may to some extent require a shift in competencies within the central procurement organization. However, the leadership efforts required to make this happen are outbalanced by the long-term positive cost effect of delivering on the commercial potential from procurement.
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Director and head of Next Generation Operating Model at Knowit Insight, has several years of experience from strategic procurement and operating model transformations as a management consultant and line manager in large multinational companies
Manager at Knowit Insight, has led and delivered several strategic procurement and operating model optimization engagements for large multinational companies